Title: Assessment of the Regional Economic Impacts of Catastrophic Events: CGE
analysis of resource loss and behavioral effects of a RDD attack scenario

Abstract

Using a large-scale CGE model, we investigate the short-run and long-run regional
economic consequences of a catastrophic event - attack via radiological dispersal device
(RDD) - centered on the downtown Los Angeles area. We distinguish two main routes via
which such a catastrophic event might affect regional economic activity: (i) reduction in
effective resource supply (the resource loss effect) and (ii) shifts in the perceptions
of economic agents (the behavioral effect). Broadly, the resource loss effect relates to
the physical destructiveness of the event, while the behavioral effect relates to changes
in fear and risk perception on the part of firms, households and government. Both affect
the size of the regional economy. RDD detonation (Dirty Bomb) causes little direct
capital damage and few casualties, but generates substantial short-run resource loss via
business interruption. Changes in fear and risk perception increase the supply cost of
resources to the affected region, while simultaneously reducing demand for goods produced
in the region. In both the short-run and long-run in the affected region, households may
require higher wages to work, investors may require higher returns to invest, and
economic agents may switch their preferences away from goods produced. We show that
because perception effects may have lingering long-term deleterious impacts on both the
supply-cost of resources to a region and willingness to pay for regional output, they
have the potential to generate changes in real regional GDP that are much greater than
those generated by the resource loss effect. Implications for policy that might mitigate
these effects are discussed.

JEL classification: H56, R13, C68, D58.

Please cite the later published version in:
Risk Analysis, Vol. 32(4), April 2012, pp. 583-600.